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1.1 An annuity is a lump sum of money which is invested, for the purpose of securing a constant income for a specified period.
1.2 Generally, the return is guaranteed for a period of time at a fixed rate. The risk of being able to grow the initial investment in order to pay the fixed income, is taken by the investment company.
1.3 The advantages to the investor, are usually in the favorable tax benefit that accrues, as well as the guaranteed income.
1.4 The annuity increases by its interest return and pays out a fixed sum for the duration of the specified period. At the end of the specified duration, the funds are depleted and the investment is terminated.
2.1 Starting capital is the amount of capital invested.
2.2 Years to pay out is the length of the investment.
2.3 Growth rate is the return that is generated by the investment company on the intial capital funds.
2.4 Payment frequency is the amount of income payments made each year : monthly, quarterly or annually.
2.5 Start payments immediately – if checked, then the first income payment is received immediately that the investment is made;
2.6 If unchecked, then income payments start after the specified duration.
3. Special note
If the Years to Pay Out is set at one year and the Start Period is left checked, the full capital sum is simply returned to the invester.
4.1 For an investment of $100,000 over 20 years at a return of 8%, the following annual income payments will be made :
4.1.1 if immediate income is selected : $9,430.76
4.1.2 if income is defered until the end of the first year : $10,185.22
4.1.2 if income is defered until the end of the second year : $11,000.04
4.2 In general, the quicker the income payments are made, the less the income growth is able to build up and therefore the smaller the the total income. $100,000 invested over 5 years with a return of 10%
and income payment defered to the end first year, returns overall
$127,482.53 in monthly payments
$128,294.35 in quarterly payments
$131,898.73 in annual payments